6 Mar 2009

UK interest rate cut to record low of 0.5%

7:13 am on 6 March 2009

The Bank of England cut interest rates by half a percentage point to a record low of 0.5% on Thursday, and said it would pump 75 billion pounds of new money into buying assets, mostly gilts, to combat the recession.

UK government bonds soared on the news the central bank would be starting so-called quantitative easing - effectively printing money - on such an aggressive scale over the next three months.

The asset buying programme equates to around 5% of GDP.

Doubts remain over whether it will work but the bank may have had no choice as the economy shrank at its fastest pace in nearly three decades at the end of 2008, house prices are sinking at record rates and hundreds of thousands of jobs have disappeared.

"The world economy has turned down very rapidly since last autumn, the amount of money is not growing at all, and the economy is in a recession, so we need to increase the supply of money," bank governor Mervyn King told Sky Television.

Quantitative easing has previously only been tried in Japan in the early part of the decade with limited success. But it has now become a watchword for central banks everywhere as interest rates near zero in the most serious world downturn for decades.

The government set the central bank an overall limit of 150 billion pounds for new money it can create, though 50 billion of this is money which had been previously earmarked for the Asset Purchase Facility but will now be unfunded.